Apr 20, 2009 22 Comments ›› Pat Dollard
WASHINGTON – President Obamaâ€™s top economic advisers have determined that they can shore up the nationâ€™s banking system without having to ask Congress for more money any time soon, according to administration officials.
In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the governmentâ€™s existing loans to the nationâ€™s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank â€” and give the government a large ownership stake in return.
While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.
The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.
More risk to taxpayers
Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bankâ€™s board.
Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.
Treasury officials estimate that they will have about $135 billion left after they follow through on all the loans that have already been announced. But the nationâ€™s banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other loan defaults.
In his budget proposal for next year, Mr. Obama included $250 billion in additional spending to prop up the financial system. Because of the way the government accounts for such spending, the budget actually indicated that Mr. Obama might ask Congress for as much as $750 billion.